In a speech on 27 August, Prime Minister Keir Starmer gave a strong hint of tax hikes to come, warning that the Autumn Budget will be "painful" because the government has "no other choice". However, investors have already started to feel the impact of tax hikes implemented over the past two years, as new figures highlight.
The dividend tax-free allowance, which was set at £2,000 for half a decade, was halved by former chancellor Jeremy Hunt to £1,000 in April 2023, then again to £500 from April 2024. As a result, the number of people expected to pay dividend tax in the current tax year has risen to roughly 3.6mn, according to HMRC estimates obtained by AJ Bell this month – almost twice as many as in 2021-22. Because investors who only receive small dividend amounts now have to pay up, one notable consequence is that the average dividend tax bill plummeted, from £8,030 in 2021-22 to an estimated £4,973 this year.
As this implies, the decision to reduce the allowance rather than increase dividend tax rates has resulted in small income investors being hit the hardest, at least proportionally speaking. Someone who receives £2,000 in dividends will have suffered the same tax hike as someone who receives £20,000. If you receive £2,000 or more worth of dividends, regardless of how much that "more" is, this year you will owe £131.25, £506.25 or £590.25 more dividend tax than you did in 2022-23. The figure varies depending on whether you are a basic, higher or additional-rate taxpayer, with the rates set at 8.75 per cent, 33.75 per cent and 39.35 per cent, respectively.